# Bear Communications, LLC

> United States Bankruptcy Court, D. Kansas · October 19, 2021

URL: https://www.frixlaw.com/law-library/cases/10457844

## Case

- **Court:** United States Bankruptcy Court, D. Kansas
- **Decided:** October 19, 2021
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10457844

## How later opinions describe it (automated extraction)

- describing the § 544(a) cause of action

## Opinion text

Bank
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SO ORDERED. a) ea re □□□ □□
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SIGNED this 19th day of October, 2021. Oe eS) Zi a

istrict

Dale L. Somers
United States Chief Bankruptcy Judge

Designated for online use but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS

In re:
Bear Communications, LLC, Case No. 21-10495-11
Debtor.
Memorandum Opinion and Order
Granting Motion for Derivative Standing
The Official Committee of Unsecured Creditors (the “Committee’”) of
Debtor Bear Communications, LLC seeks derivative standing as an exercise
of its powers under 11 U.S.C. § 1108(c)(5)! to assert claims on behalf of
Debtor’s bankruptcy estate against Debtor’s primary secured creditor The

1 Future statutory references are to title 11, the Bankruptcy Code, unless otherwise
stated.

Central Trust Bank (“Central Bank”).2 The Court follows the majority
position in the case law that derivative suits are available in certain
circumstances and concludes the Committee has met its burden to show those
circumstances are present here. As a result, the Court grants the
Committee’s motion.?
I. Procedural Background
Debtor, a telecommunications company, filed its Chapter 11
bankruptcy petition on May 28, 2021. Brett Niles is the 100% equity owner
and chief executive officer of Debtor.4 On June 29, 2021, the United States
Trustee formed the Committee under § 1102.5 Central Bank is Debtor’s
primary secured lender, and Debtor reports Central Bank is secured in “all”
its assets. The Small Business Administration (“SBA”) holds a relatively
small secured interest as well.

2 Central Bank notified the Court of a reorganization and merger on October 12,
2021, changing its name from Central Bank of the Midwest to The Central Trust
Bank. Doc. 349.
3 Doc. 280. The Committee appears by James R. Irving of Dentons Bingham
Greenbaum LLP. Central Bank appears by Paul Croker and Erin Edelman of
Armstrong Teasdale LLP.
4 Doc. 1 p. 61; Doc. 4; Doc. 80 p. 158. The parties reported on September 27, 2021,
in connection with a dispute about the use of cash collateral, that Mr. Niles would
be resigning as chief executive officer.
5 Section 1102 directs the United States Trustee to “appoint a committee of
creditors holding unsecured claims” in Chapter 11 cases and provides the procedure
for that process.
8 Doc. 80 p. 17.

Debtor did not file its Schedules until June 11, 2021, and therein
disclosed ten vehicles valued at $302,734.27" and forty-four trailers valued at
$270,993.27.8 The Committee alleges based upon a production of documents
by Central Bank that there are five additional trailers that were not listed.
The Committee also believes there are additional undisclosed motor vehicles.
Debtor’s Schedules also disclosed two checking accounts at filing: one at
Central Bank with a balance of $10,000 and one at Bank of America with a
balance of $200,640.03.
Throughout the case the parties have litigated Debtor’s use of cash
collateral. A Fifth Interim Order Authorizing the Use of Cash Collateral and
Granting Adequate Protection was entered August 17, 2021 (“Fifth Interim
Order’), granting use of cash collateral through October 29, 2021.!° Under the
terms of the Fifth Interim Order the parties agreed to certain positions
regarding security. The Fifth Interim Order states, in pertinent part:
The [Committee], or other party in interest, as applicable, shall
have until September 6, 2021 (the “Challenge Deadline”) to
investigate and, if necessary, challenge the priority, validity,
amount, or secured status of any prepetition security and liens
eranted to [Central Bank] or the SBA by the Debtor (the
“Challenge”). The [Committee], or other party in interest, as
applicable, may commence a Challenge by initiating a contested
matter or adversary proceeding asserting a Challenge, or by filing

7 Id. p. 6 and p. 7.
8 Id. p. 6 and p. 7-8.
9 p. 1.
10 Doc. 212.

a motion for standing to pursue such a proceeding. Upon a motion
to the Court by the [Committee], the Challenge Deadline may be
extended by 30 days. [Central Bank] and the SBA reserve their
right to object to such extension motion. The Challenge Deadline
may otherwise be extended only for cause or by the agreement of
[Central Bank], the SBA, and the [Committee]. After the
expiration of the Challenge Deadline and to the extent no
Challenge proceeding is timely commenced or remains pending,
the [Committee], the Debtor, and all parties in interest shall be
barred and enjoined from contesting the priority, validity, amount,
and secured status of any prepetition security and liens granted to
[Central Bank] or the SBA by the Debtor, and such prepetition
liens granted to [Central Bank] or the SBA by the Debtor shall be
deemed valid, binding, and enforceable.!!
On August 30, 2021, Central Bank filed a proof of claim asserting a
secured claim of $5,899,295.15.!2 On September 2, 2021, the Committee
demanded—by letter to Debtor—that Debtor file a complaint challenging the
perfection of Central Bank’s liens on vehicles, trailers, and Debtor’s Bank of
America bank account, avoiding those liens, and recovering the avoided liens.
The Committee also demanded Debtor file a complaint seeking turnover of
property of the estate from Central Bank, recovery of preferential payments,
and relief under the equitable doctrine of marshaling, also naming Big Bear
Leasing, Inc. and Brett Niles as potential defendants on the marshaling

ll Jd. p. 16-17. The Fifth Interim Order is the subject of further litigation, for
reasons not pertinent here, and modification of it is pending. See Doc. 302 and
responses thereto.
12 Proof of Claim No. 81-1.

claim. The Committee gave Debtor until September 5, 2021 to file a
complaint.'? Debtor did not pursue a complaint in its own name.
The Committee then filed the motion for derivative standing that is

now under consideration. In the proposed complaint attached to that motion,
the Committee alleges Debtor, Big Bear Leasing, Inc, and Big Bear
Investments entered into a loan agreement, commercial security agreement,
and promissory note with Central Bank on March 8, 2016, with an original
principal amount of $12 million. Under these loan documents, Debtor granted
Central Bank a security agreement in substantially all of its assets. A
separate security agreement was also entered by Big Bear Leasing, Inc,
granting a security interest in its assets. And then on January 5, 2021, Brett
Niles executed a guaranty agreement for the debt in favor of Central Bank,
secured by Mr. Niles’ personal assets.
The Committee alleges Central Bank filed UCC-1 financing statements
for Debtor’s assets but failed to perfect its security agreement in certain of
Debtor’s motor vehicles! and in Debtor’s Bank of America account.!© Some of

13 Doc. 315-1 p. 2.
14 The Committee alleges certain motor vehicles titled in Kansas, Ohio, Alabama,
Missouri, Arizona, and Tennessee are unperfected because of no notation on the
certificate of title; namely, six vehicles with a total value of $142,519.27 and thirty-
one trailers with a total value of $176,415.97. Doc. 280-1 p. 19.
15 The Committee alleges there is no deposit account control agreement concerning
the Bank of America account that would grant Central Bank control over the
account.

these vehicles were not identified on Debtor’s Schedules. Central Bank
conducted both prepetition and postpetition sweeps of the Bank of America

account.
The Committee also alleges that Mr. Niles is not only the equity owner
and executive officer of Debtor but is also the 100% equity owner of Big Bear
Leasing, Inc. and Big Bear Investments and the officer exercising control of

all these entities. The Committee claims the three business entities (Debtor,
Big Bear Leasing, Inc and Big Bear Investments) are all alter egos of Mr.
Niles and of each other. Neither Big Bear Leasing, Inc. nor Big Bear
Investments maintain corporate formalities and the funding, accounting, and

operations of both are commingled with Debtor’s operations, as evidenced by:
- Big Bear Leasing, Inc. and Big Bear Investments have no
employees. Both entities utilize Debtor’s employees for operations.
Debtor’s funds are used for both entities’ costs and expenses,
including, for example, property taxes and operating expenses
incurred by Big Bear Investments in connection with an investment
in The Oaks game ranch. Debtor’s funds are also used to pay
personal expenses of Mr. Niles.

- There are no management agreements or cost sharing agreements
in place between the various entities to compensate or reimburse
Debtor for such costs or expenses.

- Debtor, Big Bear Leasing, Inc. and Big Bear Investments do not
accurately track or account for intercompany loans or transfers.

The Committee claims that certain assets identified on Debtor’s Schedules
are actually titled to Big Bear Leasing, Inc.
The Committee alleges that a little over two months prepetition, on
March 16, 2021, Mr. Niles cause Debtor to transfer to him $1 million. At

Debtor’s § 341 meeting of creditors, Mr. Niles testified he did not remember
what he did with the $1 million. At a subsequent Rule 2004 exam, Mr. Niles
testified that he used $600,000 of the funds to purchase a new home and the
remainder was used for personal expenses, a repayment of a personal loan,

and payment back to Debtor. The Committee alleges the $1 million transfer
was made with the actual intent to hinder, delay, or defraud creditors, and
that Debtor did not receive reasonably equivalent value in exchange.
Finally, the Committee alleges Mr. Niles is also the 75% equity owner

in, and officer exercising control over, an entity called Open Country LLC.
This entity was formed March 11, 2021—five days prior to the $1 million
transfer. The entity—like Debtor—provides long haul fiber construction
services. The Committee alleges Mr. Niles capitalized Open Country LLC

with approximately $750,000 shortly after receiving the $1 million transfer
from Debtor. Prepetition, Debtor was performing on contracts to
Midcontinent Communications and ImOn. The Committee alleges Mr. Niles
caused Debtor to assign or transition Debtor’s prepetition contracts with

these companies to Open Country LLC and that Open Country LLC is now
not only performing on these or similar contracts but also utilizing Debtor’s
employees to do so and the expenses of these employees is being borne by
Debtor postpetition.

The Committee’s proposed complaint alleges multiple causes of action,
as follows:
- Count 1: Against Central Bank, challenging Central Bank’s
perfection of its security interest in Debtor’s Bank of America
account.

- Count 2: Against Central Bank, challenging Central Bank’s
perfection of a security interest in the contested motor vehicles.

- Count 3: Against Central Bank, seeking avoidance of the
unperfected liens on the Bank of America account and motor
vehicles pursuant to § 544(a).

- Count 4: Against Central Bank, seeking preservation of the
unperfected liens and security agreements for the bankruptcy estate
under § 551.

- Count 5: Against Central Bank, seeking avoidance as a preferential
transfer under § 547 the prepetition sweeps of the Bank of America
account done within ninety days of the petition date due to the
avoidable prepetition lien of Central Bank on that account.

- Count 6: Against Central Bank, seeking recovery of the transfers
avoided under § 544 and § 547.

- Count 7: Against Central Bank, seeking turnover of the amount
taken by Central Bank in its postpetition sweeps of the Bank of
America account under § 542(a).

- Count 8: Against Central Bank, Big Bear Leasing, Inc., and Mr.
Niles, requesting application of the equitable doctrine of marshaling
such that Central Bank is required to satisfy the amounts due from
Debtor under the parties’ loan agreements by first exhausting
recovery on collateral belonging to Big Bear Leasing, Inc. and Mr.
Niles.
Central Bank is the only party who has filed an opposition to the motion for
derivative standing.
II. Analysis
Matters concerning the “administration of the estate” are core
proceedings under 28 U.S.C. § 157(b)(2)(A), over which this Court may
exercise subject matter jurisdiction. □□
A. Case Law about Derivative Standing
The Committee’s motion for derivative standing seeks authority from
this Court to assert causes of action that include statutory claims that would
generally be asserted by Debtor’s bankruptcy estate. A committee of creditors
is authorized by the Code to:
(1) consult with the trustee or debtor in possession concerning the
administration of the case;
(2) investigate the acts, conduct, assets, liabilities, and financial
condition of the debtor, the operation of the debtor’s business and
the desirability of the continuance of such business, and any other
matter relevant to the case or to the formulation of a plan;
(3) participate in the formulation of a plan, advise those
represented by such committee of such committee’s
determinations as to any plan formulated, and collect and file with
the court acceptances or rejections of a plan;
16 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and §§ 1334(a) and (b)
and the Amended Standing Order of the United States District Court for the
District of Kansas that exercised authority conferred by § 157(a) to refer to the
District's Bankruptcy Judges all matters under the Bankruptcy Code and all
proceedings arising under the Code or arising in or related to a case under the Code,
effective June 24, 2013. D. Kan. Standing Order 13-1 printed in D. Kan. Rules of
Practice and Procedure (March 2018).

(4) request the appointment of a trustee or examiner under section
1104 of this title; and
(5) perform such other services as are in the interest of those
represented.!7
The Code therefore grants a committee of creditors significant powers, but
does not directly address the power of a committee to bring claims that would
typically be asserted by the debtor in possession; the statutes creating the
claims in the Committee’s proposed complaint grant power to bring the

causes of action to the trustee or debtor in possession.!® Many courts have
considered whether a committee of creditors has an implied right, through
derivative standing, to pursue claims that would typically be pursued by a
trustee or debtor in possession.
The discussion of case law in this area generally begins with the
Supreme Court’s decision in Hartford Underwriters Ins. Co. v. Union Planters
Bank, N.A.'9 In that case, the Supreme Court analyzed the language of §
506(c), which grants power to “the trustee” to recover from “property securing

17 11 U.S.C. § 1103(¢).
18 F.g., 11 U.S.C. § 542(a) (requiring entities to “deliver to the trustee” property that
is beneficial to the estate), § 544 (giving “the trustee” certain rights and powers to
avoid voidable transfers of property), § 547 (permitting “the trustee” to avoid certain
statutorily defined preferential transfers) and § 1107(a) (giving a Chapter 11 debtor
in possession the rights and powers of a trustee).
19 §30 U.S. 1 (2000).
10

an allowed secured claim” the costs of preserving that property,2° and
whether an administrative claimant could recover under that provision or
only the trustee.?! The Supreme Court concluded that because the statute
specified the party to take action, exclusivity to that party was intended,
especially where the Code overall granted the specified party a unique role in
bankruptcy proceedings.”? In a footnote, the Supreme Court noted it was not
addressing whether a bankruptcy court could “allow other interested parties
to act in the trustee’s stead” or the practice of “allowing creditors or creditors’
committees a derivative right to bring avoidance actions when the trustee
refuses to do so, even though the applicable Code provisions, see 11 U.S.C. §§
544, 545, 547(b), 548(a), 549(a), mention only the trustee.”2? The Supreme
Court limited its holding to rejecting the ability of the administrative
claimant to assert “an independent right” to use the statute.?4
Shortly after the decision in Hartford Underwriters Ins. Co., the Tenth
Circuit BAP considered the issue of derivative standing for a claim under §

20 Section 506(c) states: “The trustee may recover from property securing an
allowed secured claim the reasonable, necessary costs and expenses of preserving,
or disposing of, such property to the extent of any benefit to the holder of such
claim, including the payment of all ad valorem property taxes with respect to the
property.”
21 §30 U.S. at 6.
22 Id. at 6-7.
23 Id. at 13 n.5.
24 Id.
11

548 in United Phosphorus, Ltd. v. Fox (In re Fox).”> In Fox, the Tenth Circuit
BAP addressed whether creditors may bring derivative suits on behalf of the
bankruptcy estate in light of Hartford Underwriters Ins. Co. and concluded
the Supreme Court’s analysis foreclosed the derivative suit. The Tenth
Circuit BAP reasoned that the Code was “explicit, unambiguous and
absolute” that “the trustee” could bring an action under § 548, and therefore
the Hartford Underwriters Ins. Co. decision required the plain language to be
followed.26 The Tenth Circuit BAP noted the footnote from Hartford
Underwriters Ins. Co. recognizing the practice of derivative suits after
obtaining bankruptcy court permission when a trustee refuses to act, but
concluded the Supreme Court’s language used in assessing the plain
language of § 506(c) was “so clear and compelling” that the BAP “was
convinced it would apply the same reasoning” and “reach the same
conclusion” regarding derivative actions under § 548 if the question had been
presented.?7

25 305 B.R. 912 (10th Cir. BAP 2004). Section 548(a)(1) states: “The trustee may
avoid any transfer (including any transfer to or for the benefit of an insider under
an employment contract) of an interest of the debtor in property, or any obligation
(including any obligation to or for the benefit of an insider under an employment
contract) incurred by the debtor, that was made or incurred on or within 2 years
before the date of the filing of the petition|.]”
26 305 B.R. at 914-16.
27 Id. at 915.
12

The Tenth Circuit has not itself directly addressed derivative suits. A
few years after the BAP’s decision in Fox, the Tenth Circuit noted the issue,
but not the Fox case, in Hill v. Akamai Technologies, Inc. (In re MS55).?8 In
the MS55 case, the Tenth Circuit considered a bankruptcy case converted
from Chapter 11 to Chapter 7 and whether the waiver by the then Chapter
11 debtor-in-possession to bring avoidance actions against a secured creditor
survived the conversion to Chapter 7 such that the trustee was barred from
suit.29 The prior waiver reserved the right of the Chapter 11 unsecured
creditors’ committee to bring suit, but the committee did not so act.?°
Addressing the Chapter 7 trustee’s argument that he inherited the
unexhausted right retained by the creditors’ committee to bring an avoidance
action—which it rejected because the trustee succeeded only to the debtor’s
rights, not the committee’s rights—the Tenth Circuit noted that “courts have
permitted creditors’ committees to bring actions in the name of the debtor,
usually only in connection with actions against insiders or other persons that
the debtor in possession has refused or is reluctant to sue,” and concluded
that because of this, “any rights the creditors’ committee has to an avoidance
action are derivative of the debtor and the estate’s claims.”?! Despite this

A477 F.3d 1131 (0th Cir. 2007).
29 Td. at 1134-35.
30 Td. at 1134.
31 Jd. at 1139 Gnternal quotations omitted).
13

statement, the Tenth Circuit then noted in a footnote, however, that a
“committee’s right to bring an avoidance action is not without question,”
citing the Hartford Underwriters Ins. Co. decision.*2 Ultimately, the Tenth
Circuit declined to decide the issue: “Because we conclude the trustee does
not succeed to the committee’s rights ... we need not discuss the availability
of these rights since Hartford. It is enough to note that to the extent the
creditors’ committee has a right to initiate an avoidance action, its right is
derivative of the debtor-in-possession’s right and is exercised on behalf of the
bankruptcy estate.”°°
The Tenth Circuit has not addressed derivative actions since the In re
MS55 case. Despite this, there is a plethora of case law from other circuits,
and the other circuits who have squarely addressed the issue post-Hartford
Underwriters Ins. Co. have all permitted creditors or creditors’ committees to
maintain derivative suits when the trustee or debtor in possession has
refused and the creditor or committee obtains the permission of the
bankruptcy court. Some of those circuit court decisions have reached this
decision without addressing the Hartford Underwriters Ins. Co. case.*4 Other

32 Id. at 1139 n.9.
33 Td,
34 See, e.g., Wooley v. Haynes & Boone, L.L.P. dn re SI Restructuring Inc.), 714 F.3d
860, 863 (5th Cir. 2013) (noting the “general rule” that a creditor “has the right to
seek authority to pursue causes of action on behalf of a debtor-in-possession” and
citing prior Fifth Circuit authority in La. World Exposition v. Fed. Ins. Co., 858
F.2d 233, 247 (5th Cir. 1988), for this “well-settled” law); Jones v. Phillip
14

circuit courts have directly addressed Hartford Underwriters Ins. Co. and
determined it does not control.*° For example, as the Sixth Circuit explained:
[A]voidance provisions—make no reference to derivative standing
and state only that “the trustee may” bring certain avoidance and
recovery actions. If these were the only relevant sections of the
Code, Hartford Underwriter’s interpretation of “the trustee may”
in § 506(c) would weigh strongly against derivative standing given
the “natural presumption that identical words used in different
parts of the same act are intended to have the same meaning.”

Schlosberg, a Profil Corp. (In re Jones), 178 Fed. App’x 662, 664 (9th Cir. 2006)
(“The district court properly held that the bankruptcy court did not err in allowing
[the creditor] to bring the avoidance action after the trustee refused to do so.”);
Enodis Corp. v. Emp’rs Ins. of Wausau (In re Consol. Indus. Corp.), 360 F.3d 712,
716-17 (7th Cir. 2004) (“Bankruptcy law does allow a creditor to bring a derivative
claim on behalf of the estate, but only in limited circumstances. To do so, a creditor
must show that the trustee has unjustifiably refused the creditor’s demand to
pursue a colorable claim and obtain leave from the bankruptcy court to proceed.”
(citing Fogel v. Zell, 221 F.3d 955, 965-66 (7th Cir. 2000))).
35 See, e.g., Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc. (In re
Trailer Source, Inc.), 555 F.3d 231, 245 (6th Cir. 2009) (‘we reaffirm the continued
vitality after Hartford Underwriters of granting derivative standing to creditors to
pursue avoidance actions on behalf of the estate and hold that this practice is
available in both Chapter 11 and Chapter 7 proceedings”); PW Enters., Inc. v. N.D.
Racing Comm'n (In re Racing Servs., Inc.), 540 F.3d 892, 898, 898 n.7 (8th Cir.
2008) (“derivative standing is available to a creditor to pursue avoidance actions
when it shows that a Chapter 7 trustee (or debtor-in-possession in the case of
Chapter 11) is ‘unable or unwilling’ to do so”; noting in a footnote that “We agree
with the Third Circuit that the Supreme Court’s decision in Hartford Underwriters
Ins. Co... . does not foreclose derivative standing under the Bankruptcy Code’);
Smart World Techs., LLC v. Juno Online Servs., Inc. (In re Smart World Techs.,
LLC), 423 F.3d 166, 177-78, 181-82 (2d Cir. 2005) (noting that under Hartford
Underwriters Ins. Co. a creditors’ committee cannot rely on § 1109(b) for
independent standing but holding that a creditors’ committee may be granted
standing to pursue a cause of action when debtor-in-possession’s refusal to do so
was unjustifiable); Official Comm. of Unsecured Creditors v. Chinery (In re
Cybergenics Corp.), 330 F.3d 548, 553, 558 (8d Cir. 2003) (en banc) (finding Hartford
Underwriters Ins. Co. “markedly different” than a derivative action to pursue an
avoidance action for the benefit of the bankruptcy estate and concluding derivative
standing was available to a creditors’ committee when a debtor-in-possession’s
refusal to pursue an avoidance action was unreasonable).
15

However, our analysis is not so cribbed, because other provisions
of the Bankruptcy Code, as well as pre-Code practice, clearly
contemplate the equitable power of bankruptcy courts to authorize
creditors, in appropriate instances, to bring claims on behalf of the
bankruptcy estate.°6
The Sixth Circuit concluded that because § 503(b)(8)(B) provides that
creditors may be compensated on a priority basis for efforts in recovering
property “for the benefit of the estate,”*’ it shows Congressional approval of
“the practice of permitting creditors, with court authorization, to pursue
claims on behalf of bankruptcy debtors.”#8 In addition, the Sixth Circuit
reasoned that Congress was aware of the practice of derivative standing at
the time § 503(b)(3)(B) was incorporated into the Code and that the Code
section would be meaningless unless derivative standing existed.*? Finally,
the Sixth Circuit reasoned that a bankruptcy court has the authority as an
exercise of its equitable power to ensure the Code’s provisions for the

recovery of assets to maximize the bankruptcy estate.‘°

36 In re Trailer Source, Inc., 555 F.3d at 240 Gnternal citation omitted).
37 Section 503(b)(3)(B) states: “After notice and a hearing, there shall be allowed
administrative expenses... including... (3) the actual, necessary expenses, other
than compensation and reimbursement specified [for reasonable compensation for
professional services], incurred by .. . (B) a creditor that recovers, after the court's
approval, for the benefit of the estate any property transferred or concealed by the
debtor.”
38 In re Trailer Source, Inc., 555 F.3d at 240.
39 Td. at 242; In re Cybergenics Corp., 330 F.3d at 567 (“when they are paired with §
503(b)(3)(B), it becomes unmistakably clear that Congress approved of creditors’
committees suing derivatively to recover property for the benefit of the estate’).
40 In re Trailer Source, Inc., 555 F.3d at 242, 242-43 (“this equitable remedy
effectuates Congress’s intent that fraudulently transferred property be recovered for
16

Other circuit courts have reasoned that § 1103(c)(5), which as noted
above, says that creditors’ committees may “perform such other services as

are in the interest of those represented” grants permission for derivative
standing to a committee.*! One BAP court noted that § 1107(a), which states
that a debtor-in-possession “shall perform all the functions and duties” of a
trustee, subject to “such limitations or conditions as the court prescribes,”
also provides support for derivative standing.*? Other circuits and BAP’s also
rely at least in part on § 1109(b), which states that creditors’ committees
“may raise and may appear and be heard on any issue in a case” under
Chapter 11.4? Suffice to say most bankruptcy courts and appellate courts
considering the issue have concluded the practice of granting derivative

the bankruptcy estate”); In re Cybergenics Corp., 330 F.3d at 568 (“We believe that
the ability to confer derivative standing upon creditors’ committees is a
straightforward application of bankruptcy courts’ equitable powers.”).
41 In re Smart World Techs., LLC), 423 F.3d at 183 n.27 (‘This court has previously
recognized that § 1103(c)(5) provides a statutory basis for granting derivative
standing in some cases.”); In re Cybergenics Corp., 330 F.3d at 563 (stating that §
1103(c)(5) provides “clear evidence that Congress envisioned a central role for
creditors’ committees in Chapter 11” and “indirect evidence that Congress granted
bankruptcy courts the power to confer derivative standing upon those committees”).
42 Jefferson County Bd. of County Commissioners v. Voinovich Un re The V
Companies), 292 B.R. 290, 295 (6th Cir. BAP 2003).
43 In re Cybergenics Corp., 330 F.3d at 566 (“Sections 1109(b) and 1103(c)(5), taken
together, evince a Congressional intent for committees to play a robust and flexible
role in representing the bankruptcy estate, even in adversarial proceedings.”);
Unsecured Creditors Committee of Debtor STN Enterprises, Inc. v. Noyes In re STN
Enterprises), 779 F.2d 901, 904 (2d Cir. 1985) (“Most bankruptcy courts that have
considered the question have found an implied, but qualified, right for creditors’
committees to initiate adversary proceedings in the name of the debtor in
possession under 11 U.S.C. §§ 1103(¢)(5) and 1109(b).”); In re The V Companies, 292
B.R. at 295.
17

standing in appropriate circumstances was not foreclosed by Hartford
Underwriters Ins. Co.“
This court addressed derivative standing in Village of Overland Pointe,
LLC v. Terra Bentley Il, LLC (In re Terra Bentley II, LLC).*° In Terra Bentley
IT, LLC, a creditor sought to bring an adversary action against the debtor
under the Kansas Uniform Fraudulent Transfer Act to avoid a mortgage the
debtor gave to a separate creditor prepetition.4¢ This Court recognized the
“many courts” that had permitted derivative standing under certain
circumstances for creditors to pursue claims otherwise belonging to a trustee

or debtor-in-possession, although it concluded the factual predicate for
derivative standing had not been satisfied in that case.47 The Court stated:
“The Tenth Circuit has apparently not yet ruled on the question. No Circuit
court appears to have concluded derivative standing for creditors is never
permissible, though, and the Court sees no reason to believe the Tenth
Circuit would disagree with the unanimous view of the Circuits that have
decided the question.”48

44 See, e.g., In re Roman Catholic Church of Archdiocese of Santa Fe, 621 B.R. 502,
506-08 (Bankr. D.N.M. 2020) (providing extensive summary of development of case
law and citing cases).
45 No. 09-23107, 2011 WL 808190 (Bankr. D. Kan. Mar. 2, 2011).
46 Td. at *1.
47 Td. at *4.
48 Td. Admittedly, the Court did not address the Tenth Circuit BAP’s position in
Fox.
18

The Court continues to believe that the Tenth Circuit would join with
other circuits in recognizing derivative standing suits in limited
circumstances where the trustee or debtor-in-possession has unjustifiably
refused to pursue the proposed claims. The decision by the Tenth Circuit BAP
in Fox is a minority position, provided shortly after Hartford Underwriters
Ins. Co. was decided and without the benefit of the more than twenty years of

case law development that has since occurred.*? As a result, if the Committee

can carry its burden to show it petitioned Debtor to bring the claims, Debtor
unjustifiably refused, and its claims are colorable,®° this Court will grant
permission to bring a derivative suit.
B. Has the Committee Established Derivative Standing
The Committee demanded Debtor bring the claims now stated in its
proposed complaint, thereby satisfying the requirement that it first petition

49 In In re Quick, the Court indicated it considered Tenth Circuit BAP decisions to
be persuasive authority that “should be followed in the absence of compelling
reasons to depart.” In re Quick, No. 07-2191, 2008 WL 474266, at *3 (Bankr. D.
Kan. Feb. 14, 2008). As described in the text, the Court believes compelling reasons
are present here.
50 In re Racing Servs., Inc., 540 F.3d at 900 (“We therefore hold, to establish
derivative standing, a creditor must show: (1) it petitioned the trustee to bring the
claims and the trustee refused; (2) its claims are colorable; (3) it sought permission
from the bankruptcy court to initiate an adversary proceeding; and (4) the trustee
unjustifiably refused to pursue the claims. We expect in most cases creditors will
readily satisfy the first three elements without much difficulty—petitioning the
trustee and bankruptcy court ought to be mere formalities.”). By filings its motion,
the Committee has satisfied the requirement that it seek permission from the
bankruptcy court prior to bringing the derivative action.
19

Debtor to bring the claims.®! The remaining questions are whether Debtor’s
refusal to pursue the claims was unjustifiable and whether the claims are
colorable.
Claims are colorable if they would survive a motion to dismiss. Under
the familiar motion to dismiss standards, “a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.”5? A claim is facially plausible if the factual content
plead, as opposed to legal conclusions made, allow a court to draw the
reasonable inference that the stated claim is present.54 The Court does not
“weigh potential evidence that the parties might present at trial” but instead

assesses whether the proposed complaint “is legally sufficient to state a claim
for which relief may be granted” if the factual allegations are “accepted as
true and viewed in the light most favorable” to the movant.*

51 The Committee’s correspondence to Debtor demanding claims be brought is
located at Doc. 315.
52 In re Racing Servs., Inc., 540 F.3d at 900 (“a creditor’s claims are colorable if they
would survive a motion to dismiss”).
53 Williams v. Meyer (In re Williams), 438 B.R. 679, 683 (Oth Cir. BAP 2010)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556
U.S. 662 (2009)).
54 Td. (internal quotations omitted); see also Iqbal, 556 U.S. at 678 (“A claim has
facial plausibility when the plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable for the misconduct
alleged.”).
55 In re Expert South Tulsa, LLC, 522 B.R. 634, 651 (10th Cir. BAP 2014) Gnternal
quotations omitted). In its initial response to the Committee’s motion, Central Bank
responds simply that it “possesses valid and perfected liens” and that the doctrine of
marshaling is limited and it has already employed methods to recover against Big
20

Counts 1 through 4 of the Committee’s proposed complaint challenge
Central Bank’s perfection of security interests in Debtor’s Bank of America
account and certain motor vehicles, avoidance of those unperfected liens
under § 544(a), and preservation of the unperfected liens for the bankruptcy
estate under § 551. For each alleged unperfected security interest, the
Committee identifies the facts leading it to believe the security interest is not
perfected, the state law upon which it relies that controls perfection of a
security interest in the items, and the benefit to the bankruptcy estate of
avoiding those transfers. This is sufficient to state colorable claims.*¢
Regarding the Bank of America account, Central Bank presents a factual
dispute about the source of the funds in the account,°” but again, the Court
does not weigh evidence at this point.

Bear Leasing, Inc. and Mr. Niles with a state court action. Doc. 301 p. 3-4. But
again, as stated above, at this point, the Court is asking whether the stated claims
are colorable. The merits of those claims beyond what the Court would typically
employ at the motion to dismiss stage is left for development through the adversary
proceeding that would be filed after the motion for derivative standing is granted.
56 k.g., Hamilton v. Wash. Mut. Bank FA (In re Colon), 563 F.3d 1171, 1173-74
(10th Cir. 2009) (describing the § 544(a) cause of action); AG New Mexico v. Borges
Un re Borges), 510 B.R. 306, 323 (10th Cir. BAP 2014) (detailing a cause of action
for a Chapter 11 debtor in possession under § 544(a)).
57 Doc. 321 p. 3 (arguing that Central Bank has a perfected security interest in the
funds because the funds in the Bank of America account were proceeds of accounts
receivables in which Central Bank had a perfected security interest); Doc. 333 p. 4
(arguing “the testimony at the meeting of creditors and Bankruptcy Rule 2004
examinations suggests that all of the amounts in the BOA Account may not have
been payments on accounts receivable but that they could have come from other
sources as well”).
21

Count 5 seeks avoidance as preferential transfers the amounts swept
from Debtor’s Bank of America account by Central Bank in the ninety days
prepetition. Here, the Committee’s proposed complaint alleges Central Bank
took money belonging to Debtor to satisfy its loan with Debtor despite having
no property interest in the funds, in the ninety days prior to filing, when
Debtor was insolvent. Again, this is sufficient to state a colorable claim.**
Central Bank argues the Committee failed to provide specificity regarding
the amounts transferred, dates transferred, and the identity of the transferor
and transferee,°*” but the Court concludes that a fair reading of the proposed
complaint indicates that the Committee has stated colorable claims that can
and should be developed factually through the litigation of those claims.
Count 6 simply alleges that the transfers avoided under § 544 or § 547
be recovered for the benefit of Debtor’s bankruptcy estate. Section 550 makes
the initial transferee of an avoided transfer strictly liable for the value of the

58 H.g., Bailey v. Big Sky Motors, Ltd. (In re Ogden), 314 F.3d 1190, 1196 (10th Cir.
2002) (“Under the terms of § 547, a transfer is avoidable if it: (1) is of an interest of
the debtor in property; (2) is for the benefit of a creditor; (3) is made for or on
account of an antecedent debt owed by the debtor before the transfer was made; (4)
is made while the debtor is insolvent; (5) is made on or within ninety days before
the date the bankruptcy petition was filed; and (6) allows the creditor to receive
more than the creditor would otherwise be entitled to receive from the bankruptcy
estate.”).
59 Doc. 321 p. 2.
22

property transferred,®° and the Committee alleges Central Bank is an initial
transferee. Again, this count states a colorable claim.
Count 7 of the proposed complaint seeks turnover of the amount taken
by Central Bank in its post petition sweeps of the Bank of America account
under § 542(a). The Committee alleges Central Bank conducted regular
sweeps of the Bank of America account after Debtor’s bankruptcy filing,
taking funds that were properly part of Debtor’s bankruptcy estate, upon
which Central Bank had no property interest. The Committee alleges the
amounts taken were not of inconsequential value. These allegations support
a claim for turnover under § 542(a),®! and therefore the turnover claim is
colorable.
Finally, Count 8 of the Committee’s proposed complaint is against
Central Bank, Big Bear Leasing, Inc., and Mr. Niles, requesting application
of the equitable doctrine of marshaling such that Central Bank is required to
satisfy the amounts due from Debtor under the parties’ loan agreements by
first exhausting recovery on collateral belonging to Big Bear Leasing, Inc.
and Mr. Niles. Marshaling is an equitable doctrine, and its purpose “is to

60 Jd. at 1202 (describing recovery under § 550 and the defenses thereto).
61 k.g., In re Rosales, 621 B.R. 903, 917 (Bankr. D. Kan. 2020) (“The trustee must
establish the following elements of turnover under § 542(a): (1) the property sought
to be turned over is property of the estate; (2) the party against whom turnover is
sought is an ‘entity; (3) the entity was in possession, custody, or control of the
property during the case; and (4) the trustee may use or sell the property.”).
23

prevent the arbitrary action of a senior lienor from destroying the rights of a
junior lienor or a creditor having less security.”®? To invoke the doctrine of
marshaling, the following elements must be shown: “(1) the existence of two

or more creditors competing against the same debtor; (2) the existence of two

or more funds belonging to the debtor; and (3) the legal right of at least one
creditor to satisfy its claim against either of the funds, when the other
creditor has access to only one fund.”6? The Committee alleges Debtor has the
rights and powers of a judgment lien and execution creditor under § 544, and
that therefore Debtor has the powers of a junior creditor compared to Central
Bank as senior creditor. The Committee also alleges Central Bank has
interests in collateral that is property of the bankruptcy estate and in
collateral that is property of Big Bear Leasing, Inc. and Mr. Niles. The
Committee argues Central Bank should be required to exhaust its recovery
on assets belonging to non-debtor entities Big Bear Leasing, Inc. and Mr.
Niles, prior to recovering against collateral that is property of the bankruptcy
estate, due to alleged inequitable conduct and actual or constructive fraud
described above. The Committee argues this Court should follow cases
extending the application of the marshaling doctrine to situations where a

62 In re Blagg, 372 B.R. 502, 506 (Bankr. D. Kan. 2007) (internal quotation
omitted).
63 Redmond v. Carson (In re Carson), 374 B.R. 247, 249 (10th Cir. BAP 2007).
24

non-debtor entity is an alter ego of the debtor or where the non-debtor has
engaged in inequitable conduct.®
Central Bank challenges whether the marshaling doctrine should be
applied on the facts present herein. Central Bank argues that extension of
the marshaling doctrine to the circumstances the Committee alleges are
present should not be permitted, and that it would be prejudiced by the
application of the marshaling doctrine.® The Court readily acknowledges
that these are difficult questions that will have to be resolved, but concludes
it is too early to resolve them at this juncture, without the benefit of further
factual development. Again, at this point, the question is whether the
Committee has stated a colorable claim, and the Court concludes it has. And
further, even without the marshaling claim, the conclusion is inescapable
that the Committee has alleged colorable claims that would benefit the estate
if proven after full development of the record.
The Court therefore concludes the Committee has satisfied the
prerequisite for derivative standing that the claims sought to be undertaken

are colorable, and the remaining requirement for derivative standing
requires the Committee to show Debtor’s refusal to bring these claims was
unjustifiable. Some circuits conclude that if the claims to be brought via

64 Doc. 280 p.14-15.
6 Doc. 321 p. 3-4.
25

derivative standing are colorable, then the refusal to pursue them makes it
unjustified.®¢ In other circuits, more is required, and the movant seeking
derivative standing must show “specific reasons” why the refusal to bring the
claims is unjustified.®” This Court previously sided with the courts requiring
a movant to give these “specific reasons.”®®
Regardless of which standard is used to determine if Debtor’s refusal to
bring claims is unjustified, the standard is met here. The Court has already
concluded the proposed clams are colorable. The clams are not frivolous and if
successful will benefit the bankruptcy estate by bringing funds back into the
estate for distribution to creditors. Debtor refused to pursue the actions, and
in fact, Debtor agreed in the Fifth Interim Order on cash collateral that it

66 B.g., In re Canadian Pac. Forest Prods., Lid., v. J.D. Irving, Ltd. (In re Gibson
Grp., Inc.), 66 F.3d 1436, 1439—40 (6th Cir. 1995) (“[W]e believe that a creditor need
not plead facts alleging the debtor-in-possession’s reason or motive for the inaction,
but may meet its burden to allege unjustified inaction through notice pleading by
alleging the existence of an unpursued colorable claim that would benefit the estate.
If the debtor-in-possession gives no reason for its inaction when a demand is made,
the bankruptcy court may presume that its inaction is an abuse of discretion
(unjustified’) if the complaint alleges a colorable claim.”).
67 B.g., In re Racing Servs., Inc., 540 F.3d at 900 (“To satisfy its burden, the
creditor, at a minimum, must provide the bankruptcy court with specific reasons
why it believes the trustee’s refusal is unjustified. A creditor thus does not meet its
burden with a naked assertion that ‘the trustee’s refusal is unjustified.’ If presented
with nothing more than this, the bankruptcy court may properly deny a creditor’s
motion without explanation. The creditor, not the bankruptcy court, has the onus of
establishing the trustee unjustifiably refuses to bring the creditor’s claim.”).
68 In re Terra Bentley I, LLC, 2011 WL 808190, at *4 (concluding that “to show
that the trustee or debtor-in-possession abused its discretion by unjustifiably
refusing to pursue the proposed claims,” a committee must give “specific reasons
why the refusal is unjustified”).
26

would waive pursuit of any claims as a condition of Central Bank agreeing to
that Order. Debtor’s management is in flux with the recent resignation of Mr.
Niles. The Court concludes the Committee has carried its burden to show the
refusal to bring the claims was unjustified, and also concludes the cost-
benefit analysis of bringing the claims weighs in favor of granting the motion.
Ill. Conclusion
The Committee’s motion for derivative standing is granted.®? The
Committee is authorized to bring its proposed complaint and litigate those
claims to final judgment.
It is so Ordered.
HEF

69 Doc. 280. To the extent the Committee seeks additional relief in its motion
beyond authority to file its claims via derivative standing, including the
disallowance of Central Bank’s claims under § 502(c), the Court concludes that
relief is premature and inappropriate at this juncture.
27

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10457844. Public record. Not legal advice.